Picture: REUTERS
Picture: REUTERS

The rand’s continuing plunge on Monday has been mostly due to emerging-market contagion based on events in Turkey, but other factors are conspiring to ensure the local currency is set for a turbulent few months.

Global monetary policy tightening: the US Federal Reserve and European Central Bank are currently moving to unwind unprecedented levels of monetary policy stimulus put in place in the wake of the 2009 financial crisis. Emerging-market currencies and bonds have benefited from ultra-low interest rates in developed markets, as these have prompted investors to seek higher yield.

Ongoing economic data releases out of the US continue to show a robust economy in that country, raising the prospect of faster than expected monetary policy tightening in that country.

Data released on Friday showed that US core consumer price inflation rose 2.4% year on year — its highest in a decade. This was after positive initial jobless claims data were released Thursday. The data are supportive of two more Fed interest-rate hikes in 2018, Rand Merchant Bank analyst Kim Silberman says.

Trade war

Ongoing attempts by the White House to reduce the US trade deficit and rein in what it sees as unfair trade practices continues to weigh on the rand, with the resulting uncertainty prompting investors to pare their positions in riskier assets, such as emerging-market currencies.

Last week, the US threatened to raise its tariffs on Chinese goods to 25%, accusing Beijing of intentionally weakening the yuan in order to escape the full effects of existing tariffs.

While economic data look set to remain resilient in the short term, the constant threat of escalation was expected to increasingly weigh on activity in the second half of 2018, according to Barclays Research analysts.

Chinese economic slowdown

Data releases out of China have shown a slowdown in manufacturing production, something that has been partly attributed to the ongoing trade war. This could affect the rand as the resulting weakness in commodity prices, and drop off in exports to SA’s largest single trading partner, could put the local currency under pressure.

"Over the past two years, a slowdown in economic growth in China coupled with a deceleration in production, gradually, inexorably cuts off the oxygen to commodity-driven markets. Without a back-up plan in place, the resource producers are left stranded," Peregrine corporate treasury manager Bianca Botes says.

Slowing emerging-market exports

Although global economic growth currently remains robust, there are worrying signs ahead for emerging-market exports, based on a slowdown in major trading partners.

Growth in the US, eurozone, Japan and China is expected to slow in 2019 and weaken further in 2020, depressing export volumes and adding to the pain of lower commodity prices, Capital Economics senior emerging markets economist John Ashbourne says.

Domestic woes

SA’s surprisingly sedate economic recovery has also contributed to pressure on the rand, with recent economic data releases often undershooting economists’ forecasts. Mining production figures due on Wednesday are being closely watched, with expectations that SA is at risk of entering a technical recession (two consecutive quarters of economic contraction).

Policy uncertainty, the need to bail out ailing state-owned enterprises, and policy uncertainty have all been cited as reasons for underperfromance, notably the issue of expropriation of land without compensation. The consensus among analysts is that international factors will remain the major catalyst behind rand movements, but that persistent uncertainty will put a cap on its movements.

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